By Will Wilson, ESG Analyst, Apex Group
Your ESG race has begun. Don’t get left behind after the March 10 starting line.
Now that the dust has settled on the initial March 10, 2021 deadline of the EU Sustainable Finance Disclosure Regulation (SFDR), you may forgive many investment managers for thinking that they have cleared the latest regulatory hurdle and are on the compliance home straight.
However, March 10 was only the starting point in the ESG race. There are many more hurdles for investment managers to navigate in the months and years ahead. Not only will the requirements of the regulation itself escalate, but also the growing pressure from investors, employees and wider society on investment managers to collect, analyse and report relevant ESG data.
Another 21 months of change
The staggered implementation of the SFDR includes detailed reports and Principal Adverse Impact disclosures throughout 2022. Considerable data will be required to feed into such reports, and managers should consider how they can identify what data is needed, which source to utilise to obtain that data and how much time is needed to collect the data, in order to comply with those obligations in 2022.
And what about non-EU managers? Can they hold off from starting their own ESG race until equivalent regulations are established in their own jurisdictions? To continue the athletics analogy, you would not turn up to the Olympics having done no training. So why try and meet disclosure requirements only as and when they come into effect? Get ahead of the pack and seize the opportunity to start collecting, analysing and reporting ESG data now – institutions cannot report data that they have not yet collected. The cost of retrospectively capturing and analysing data will be far greater than making the commitment to (continue to) capture the data now.
It is important to note that the SFDR applies to any financial market participant or adviser operating, managing or actively marketing their products in the EU – even if they are headquartered outside of the EU. So for those non-EU managers, whether they were ready or not, the ESG starting pistol has already sounded.
A new part of everyday life
The purpose of the SFDR is not to pay lip-service to ESG and carry on as usual. The SFDR has been implemented to integrate sustainability within the core of the investment process, to stamp out ‘green- and purpose-washing’ and to set a precedent for the ESG reporting expectations of investors.
As the requirements of the SFDR increase over time, those who are unprepared and have not implemented sustainable processes and systems will get caught out, overtaken, and left behind in the ESG race. That could ultimately be the difference between securing capital investment and not.
Seize the opportunity
In our recent webinar “ESG – From Niche to Mainstream: A Regulations & Compliance Roadmap” on the requirements of SFDR:
The three major ESG challenges
When we speak to investment managers, there are three recurring ESG challenges everyone is trying to solve.
- What ESG data to collect?
With the SFDR now in effect, and with the release of the final draft of the regulatory technical standards (RTS), the first question is starting to be answered: the RTS defines the key ESG metrics that all in-scope investment managers need to collect. Investment managers should look to integrate all of these RTS into their key portfolio monitoring solutions.
Instead of viewing these ESG metrics as yet another regulatory burden, the most proactive and forward-thinking managers will look to collect ESG data beyond the 18 mandatory metrics under the SFDR: using the data to draw meaningful insights and improvements in their underlying investments, maximising performance into the future.
- How to collect it?
The second reason that many investment managers use third-party ESG solutions is to solve the question: how to collect ESG data? Without effective tools at their disposal, investment managers can be left trying to perform the daunting task of extracting, verifying and interpreting all of the ESG data from their underlying investments themselves. The magnitude of this task will only intensify as the reporting requirements of both the SFDR and investors become increasingly more complex. A combination of an easy-to-use reporting tool with expert guidance and customer support is what is ideally needed.
- What to do with it?
Once managers have understood what data to gather and then collected it, the last – and arguably most important – issue they face is what to do with the data. How to use it? How to drive improvements in ESG? How to increase value for a better exit? As well as meeting all of their regulatory and investor demands, firms should not leave the data to sit there. Investment managers can gain significant added value by establishing practical recommendations and roadmaps to help invested companies and their investors target and realise the most meaningful improvements over the investment term.
Our answer to the three ESG challenges
Our pioneering ESG Ratings & Advisory solutions have been designed to reduce the burden of ESG data collection on all parties. We help companies and investment managers identify, collect, verify, analyse, rate and report on material ESG data. After analysing and benchmarking the ESG data of portfolio companies and managers, we make recommendations on how to close any ESG gaps, work towards best practice and meet all ESG demands from regulators and investors alike.
Mandatory and harmonised disclosures across the EU will give investors access to consistent and comparable data, removing information asymmetries and providing investment information that was not previously available. Investors may choose to only select those managers that have adapted their investment process to integrate sustainability considerations, regardless of whether they are in-scope of SFDR or not. ESG is here to stay so now is the time to get ahead in the ESG race, and reap the benefits of being progressive and forward thinking. After all, who wants to get left behind?
About the author
Will Wilson is an ESG analyst at Apex Group, where he provides ESG ratings and advisory services to investment managers and portfolio companies operating in the private markets. Most recently, Will was one of the experts who created Apex ESG’s Invest Check tool that assesses how investment managers integrate ESG throughout the investment process and assists in alignment to the EU Sustainable Finance Disclosure Regulation.